Contract Enforcement and Company Law

This assignment delves into the complexities of contract enforcement when dealing with corporations. It focuses on statutory assumptions outlined in s129, particularly regarding the authority of individuals entering contracts on behalf of a company. Students analyze a scenario where a contract was signed without board approval, considering factors like actual knowledge and reasonable suspicion. The assignment emphasizes the application of legal principles to determine whether the company can be held liable for the contract despite internal procedural irregularities.

QUESTION 1
Advise the various creditors as to their rights to recover their debts.
In the present question, the issue is related with the capacity of the creditors of Woodcraft Pty
Ltd to recover their money from the company. For example, you need to be seen if Forest
Products Pty Ltd can recover the amount of $20,000 from the company. In the same way, it also
needs to be seen if Eastpac Bank Ltd can recover the amount of $500,000 that were borrowed by
the company to purchase a stud. Similarly, it has to be considered a National Finance Ltd. can
recover the amount of $2,500,000 that was used for purchasing a commercial property.
The law provides that under certain circumstances, addressing can be held personally liable
regarding the debts arising out of first business. Similarly, the beneficiaries of the test can also be
held liable to indemnify the trustee where the trust funds are insufficient to fulfill the liabilities of
the trustee that have been incurred during the course of those businesses. Although trusts are
used extensively for businesses, estate management and charitable purposes, but it is significant
to know the risks involved and to seek appropriate legal advice in order to mitigate these risks.
Some of the key principles that are related with liability and indemnity and that need to be kept
in mind by trustees and beneficiaries are as follows:-
The law provides that a trustee (including a corporation) can be held individually accountable
regarding the debts that have been incurred during the course of business of the trust.1 This also
provides that the liability of a trustee towards the creditors is not restricted to the extent of the
1 Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360

assets of the trust.2 According to the Corporations Act, 2001, it has been mentioned in section
197 that the directors of corporate trustee to be considered as being jointly and individually liable
regarding the discharge of the debts of the Corporation increase the corporation has not and is
not in a position to discharge its debts and where the corporation is not eligible to be indemnified
from the assets of the trust due to (a) breach of trust by the company and/or (b) if the corporation
has acted beyond the scope of its powers as a trustee or if (c) a term of trust denies or limits the
rights of the company to be indemnified.
The court stated in the decision given in RJK Enterprises P/L v Webb3 that section 197 of the
Corporations Act should not be considered as rendering a director accountable when there is the
pride of indemnity in place but insufficient funds are present to fulfill the indemnity. This
position is contrary to the position adopted by the court in Hanel v O’Neill.4 In this decision, it
was stated by the court that s. 197, Corporations Act can be construed as meaning that the
directors of corporate trustee's can be held as guarantors for the liability that has been entered
into by the trustee. However, it was explained by Douglas J that s. 197 has been amended in
2005 with a view to amend a perceived anomaly that was present as a result of the interpretation
of decision by the Supreme Court of South Australia and also to override the decision given in
Hanel. In order to make sure that the liability of the directors of the trustee operations extends
only so far is intended when this section has been set in its original structure in the corporation
law.
The court further stated in TFML Ltd v MacarthurCook Fund Management Ltd.5 that a trustee
who enters into a contractual obligation while performing the trust may limit its liability to the
2 Elders Trustee v Reeves (1987) 78 ALR 193
3 RJK Enterprises P/L v Webb & Anor [2006] QSC 101
4 Hanel v O’Neill [2003] SASC 409
5 TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 29

extent of the right of indemnity arising from the assets of the trust. However in Yara Australia
Pty Ltd v Oswal6, it was held that the limitation will not follow as a result of the mere description
of a party as a trustee.
Therefore the law provides that the trustees are entitled to be reimbursed under equity and also
the legislation, from the assets of trust, regarding all charges and expenses that may be incurred
by them while executing the trust. This right of the trustees was to be given priority as against
the rights and interests of the beneficiaries concerning the enforcement of indemnity. In order to
secure these rights, a trustee as the charge or a lien over the assets.7
Under these circumstances and applying the legal principles mentioned above, it can be said that
in this case, Forest Products Pty Ltd can recover $20,000 from the beneficiaries of the trust. This
amount was due when the company had ordered timber worth $20,000 from Forest Products. At
the same time, acting on the advice given by the solicitor, the company decided to diversify into
real estate and horse breeding business. For this purpose, Michael and Claire had taken a loan of
$500,000 from Eastpac Bank Ltd as the directors of Woodcraft Pty Ltd. At this time, Eastpac
was advised that Woodcraft Pty Ltd is acting as a trustee and similarly a copy of trust deed was
also provided to the bank. It had been mentioned in the trust deed that the trustee is authorized
for involving in wholesale and retail furniture trade. Therefore in this case, the directors of the
corporate trustee can be held personally liable for repaying the amount of $500,000 to Eastpac
Bank Ltd., because in this case a copy of trust deed had also been provided to the bank. At the
same time, another amount of $2,500,000, and also been borrowed by the company from
National Finance Ltd. for the purpose of producing a commercial property. However, the hopes
of earning rental income were also frustrated when the company could not find suitable tenants
6 Yara Australia Pty Ltd v Oswal (No 2) [2013] WASCA 187
7 Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360

for the property. Under these circumstances, the company was unable to pay its debts. As a
result, in this case, National Finance Ltd. can recover the amount from the two directors of the
company, Michael and Claire.

QUESTION 2
Is the company bound to perform its obligations under this contract. Give reasons for your
answer.
The issue in this question is a contract signed by Tom and Jack can be enforced against the
company. This issue arises due to the fact that it has been mentioned in the constitution of the
company that before entering into a contract by the company, a formal approval from the board
is necessary. Only then, one director and company secretary can sign the contract. But in the
present case, Jack and Tom had signed the contract without obtaining the approval of the board
of the company.
However, the law provides protection to the outsiders in case of corporate contracts in order to
balance competing policy issues. Therefore, under the common law, with the help of the notion
of indoor management rule and under the statutory law, through sections 128 and 129, more of a
business convenience approach has been adopted in order to protect the outsiders while they are
dealing with companies.8 Under this policy of business convenience, it is necessary that the
accuracy of business transactions are generally given preference is compared to the financial
interests of the innocent officers, members and the creditors of a company. The common law
indoor management rule provides that when an outsider is going to form a contract with the
person who purports to be acting on behalf of the company but who does not have the necessary
authority, the contract was voidable at the option of the company unless it was ratified.9 However
such a situation resulted in a particularly harsh outcome for the outsiders, especially the
creditors, who were dealing with the company in good faith and who did not have the resources
to find if all the necessary internal approvals and requirements are satisfied in case of the
8 Lipton et al, Understanding Company Law, 10th ed (Australia: LBC 2001)
9 Meagher et al, Equity: Doctrines and Remedies, 3rd ed (Sydney: Butterworths 1992)

particular transaction.10 To deal with this issue, common law came up with the indoor
management rule. This rule was provided in Royal British Bank v Turquand which is also
popularly known as the Turquand's Case.11 According to the indoor management rule, it doesn't
provided that when an outsider is dealing with a company under good faith and without having
any notice or reasonable grounds to suspect any impropriety or irregularity is not impacted by
any such actual impropriety or irregularity concerning an internal regulation on management of
the company. As this rule provides that an outsider is not required to check if the necessary
internal action has been taken and therefore the outsider can resume the all the internal
requirements are fulfilled while entering into the transaction. This assumption is known as the
indoor management rule because it covers all the matters that are within the management of the
company and are not public.12
Similarly, the indoor management rule has also been incorporated in the Corporations Act, 2001.
The relevant sections in this regard are Ss 128 and 129 even if the indoor management rule also
has residual application.13 Therefore this rule can still assist an outsider and continue to be
relevant for the companies in case of the action by third parties, situations falling beyond the
scope of Ss 128 and 129; regarding the dealings with the corporations that does not fall under the
definition of a company mentioned in section 9 of the Corporations Act.14
In this context, there are certain assumptions present in Ss 128 and 129 that can be made by an
outsider while dealing with a company. Section 128 provides that these assumptions can be made
10 Tomasic and Bottomely, Corporations Law in Australia, (Australia: The Federation Press
1995)
11 Royal British Bank v Turquand (1856) 6 E&B 327
12 Hanrahan P et al, Commercial Applications of Company Law, 2nd ed (Australia: CCH 2001)
13 Fisher S et al, Butterworths Tutorial Series: Corporations Law, 2nd ed, (Australia:
Butterworths 2001)
14 Cassidy J, Concise Corporations Law, 3rd ed, (Australia: The Federation Press 2001)

by any person dealing with a company.15 The court had stated in Gye v McIntyre16 that the term
"dealings" as a very wide score and therefore it includes much more than a legally binding
contract or a deal. By giving a wide interpretation to the term, it is considered to include a single
transaction, purported dealings and pre-contractual negotiations.17 According to section 128(4), a
person cannot rely on the statutory assumptions if at the time of the dealing, the person knew or
had reason to suspect the assumption was not true. This exception is applicable in cases where
the outsider has actual knowledge or suspicion and not merely the circumstances where any
reasonable person would be put on inquiry.18 Moreover, the statutory assumptions mentioned in
s129(5) and (8) can only be made where it appears that the document has been instituted by the
corporation in accordance with s127. Due to this reason, where it appears that the contract was
entered into on way out for the company by person, it will be prudent for the outsider to make
inquiries regarding the source of the authority of the person entering the contract on behalf of the
company.19
As a result of the application of the above-mentioned legal principles to the facts of this question,
it can be said that although the constitution of Midas Ltd., required that the formal approval of
the board was necessary before entering into a contract, and in this case the approval of the board
was not present, still the contract signed by Jack and Tom can be enforced against Midas Ltd.
raises that in these days, the statutory assumptions mentioned in s. 129 can be made by the
outsider. Therefore it can be assumed that all the internal rules of management were complied
with before entering into the contract.
15 Redmond P, Companies and Securities Law Commentary and Material, 3rd ed (Australia: LBC
2000)
16 Gye v McIntyre (1991) 98 ALR 393
17 Hanrahan P et al, Commercial Applications of Company Law, (Australia: CCH 2000)
18 Baxt et al, Afterman & Baxt's Cases and Materials on Corporations and Associations, 8th ed
(Australia: Butterworths 1999)
19 Burnett B, Australian Corporations Law, (Australia: CCH 2001)

The effect is that the contract can be enforced against the company and the company is bound to
perform its obligations under the contract.

Bibliography
Baxt et al, Afterman & Baxt's Cases and Materials on Corporations and Associations, 8th ed
(Australia: Butterworths 1999)
Burnett B, Australian Corporations Law, (Australia: CCH 2001)
Cassidy J, Concise Corporations Law, 3rd ed, (Australia: The Federation Press 2001)
Fisher S et al, Butterworths Tutorial Series: Corporations Law, 2nd ed, (Australia: Butterworths
2001)
Hanrahan P et al, Commercial Applications of Company Law, (Australia: CCH 2000)
Hanrahan P et al, Commercial Applications of Company Law, 2nd ed (Australia: CCH 2001)
Lipton et al, Understanding Company Law, 10th ed (Australia: LBC 2001)
Meagher et al, Equity: Doctrines and Remedies, 3rd ed (Sydney: Butterworths 1992)
Redmond P, Companies and Securities Law Commentary and Material, 3rd ed (Australia: LBC
2000)
Tomasic and Bottomely, Corporations Law in Australia, (Australia: The Federation Press 1995)
Elders Trustee v Reeves (1987) 78 ALR 193
Gye v McIntyre (1991) 98 ALR 393
Hanel v O’Neill [2003] SASC 409
Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360
Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360
RJK Enterprises P/L v Webb & Anor [2006] QSC 101
Royal British Bank v Turquand (1856) 6 E&B 327
TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 29

Yara Australia Pty Ltd v Oswal (No 2) [2013] WASCA 187